Oligopoly: A Market You've Never Heard Of.

January 15, 2018
Aditya Ravindrakumar

More than just a game...

Other than the “popular” board game that you may have unwillingly played with your family, a monopoly refers to an economic market situation where there exists only one firm that provides a good or service. This type of market means that there is no competition, no substitutes and limited opportunity for new firms to enter the market due to a large barrier to entry.

A monopoly is a not a good situation for a market to be in, as the providing firm has no incentive to compete, as the firm has nobody to compete with. There is no price in providing cheaper goods or services as there is nobody else to buy them off, and there is no point in improving the product offered, as there is no alternative. If we look at a standard marketplace, say that of the smartphone industry: firms such as Apple and Samsung spend millions on research and development to provide new features, whilst other firms, such as the newly emerging OnePlus, employ price competitiveness through providing cheaper handsets with just as many features. In stark contrast to this, a monopoly only has one provider. Pure monopolies are very rare, and some argue that they do not exist, but a good example is Windows operating system before the rise of iOS and Linux. Bill Gates and Windows were in a position where they had limited incentive to improve or cheapen their operating systems as people would have purchased from them regardless.

You may question, why don’t new firms simply come into the marketplace to undercut the monopolistic firm or provide a better product. In most cases, the markets that monopolies operate in require significant capital investment. Your average Joe could not simply start making accredited operating systems to compete with Microsoft, they would not have the expertise, reputation or the funds to do so.

I mentioned it before, but monopolies are quite rare, so a more important consideration must be given to markets in an oligopolistic (yes, that’s a real word) state. An oligopolistic market is similar, however, there exists a small number of large firms that provide iterations of the product, and similarly to a monopoly, it is difficult for new firms to enter the market as per the aforementioned reasons. In an oligopoly, firms go against what is expected of them and choose to collude as opposed to compete. This means that they operate together as if they were a monopoly, although there still exists a smaller amount of competition than what is expected.

A good example of this is the duopoly (again, a real word, referring to a type of oligopoly with two firms in the market) in the cola market between Coca-Cola and Pepsi. Albeit both drinks are relatively cheap, one could choose to undercut the other and due to the price inelastic demand increase their revenue, but they both sell at similar prices so they both make a profit. Alternate firms attempt to enter the market, but they do not have the marketing budgets to compete with the soda giants.

A further example is commercial airline routes in America. Most domestic routes within America are operated by three main carriers: United, American and Delta. Between them they represent 80% of all domestic flights and although competition exists, competitors do not have the funding to invest in capital equipment of airplanes and advertising to the scale of these market giants, resulting in higher than necessary prices for consumer and lower quality than what could be possible with the absence of an oligopoly.

Aviation is a common example of everyday oligopolies. | Commentary use

It is worth mentioning that geography can also play a part in monopolistic nature of a firm. For example, in a certain area, a firm may hold a monopoly, whereas in a wider area they may be part of an oligopoly. For example, sticking with the aviation examples, Ryanair may be a monopoly in routes to Ireland, but they are part of an oligopoly with other budget airlines if we look at Europe as a larger area.

In conclusion, be aware of oligopolies, the most underrated yet important type of market that exists. Although there may appear to be competition in a market, this may not always be true as firms may have solved the prisoner's dilemma and have chosen to collude to allow the Pareto optimal outcome to have been used as opposed to the standard damaging Nash equilibrium.